“Most great investments begin in discomfort,” says Howard Marks of Oaktree Capital Management, in his latest letter to investors.
“The things most people feel good about – investments where the underlying premise is widely accepted, the recent performance has been positive and the outlook is rosy – are unlikely to be available at bargain prices.”
Marks, who co-founded New York-listed Oaktree (US: OAK) 19 years ago, is well known for making these kinds of discomforting investments. One of his preferred strategies is distressed investing – buying “the debt of companies seemingly at death’s door”.
This has paid off well: Oaktree’s distressed debt funds – which account for around 25% of the $80bn in assets – have returned more than 20% per year on average since inception.
Still, this is a style of investing that’s littered with pitfalls. For every great opportunity, there will be many traps.
Marks puts Oaktree’s consistent success down to several key principles that include scrupulous risk management, rigorous in-depth analysis and building highly specialised expertise in niche areas.